Revenue for the second quarter of 2004 increased 19% to $75.6 million from $63.4 million for the second quarter of 2003. Net income for the second quarter of 2004 increased 147% to $8.0 million, or $0.12 per diluted share, from $3.2 million, or $0.05 per diluted share, for the comparable period a year ago.

"Solid execution enabled us to accelerate revenue growth and increase profits yet again this quarter. Demand for our products was strong across the board; authenticator shipments remained robust, encryption sales exceeded our target, and web access management revenue reached a record high," said Art Coviello, president and chief executive officer.

Second-Quarter Financial Highlights

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Revenue: RSA Security increased its revenue on a sequential basis for the ninth consecutive quarter. The Company’s book-to-bill ratio for the second quarter was 1.1 to 1. RSA Security closed the quarter with $16 million in product and services backlog and $40.1 million in deferred revenue.

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Net Income: The Company’s increased revenue, coupled with continued expense management, resulted in a higher level of gross margin, operating margin and net income. Gross margin expanded to 82.2% in the second-quarter of 2004 from 79.5% in the comparable period of 2003. Operating margin, meanwhile, grew to 15.3% from 8.8% in the year-ago quarter. RSA Security’s earnings increased on a sequential basis for the sixth consecutive quarter to $8.0 million.

• Cash Position: The Company’s cash and marketable securities increased sequentially for the tenth consecutive quarter to $244.6 million on June 30, 2004. This compares with $207.3 million on December 31, 2003 and $129.4 million on June 30, 2003.

Operational Highlights

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Customers and Partners: RSA Security shipped product to more than 4,800 customers in the second quarter, including 725 new customers. The Company’s partner channel contributed greatly to this success and comprised 74% of RSA SecurID® sales, compared with 72% in the second quarter of 2003.
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RSA SecurID® for Microsoft® Windows® solution: RSA Security began an enterprise Beta Test Program for the RSA SecurID for Microsoft Windows two-factor authentication solution. The solution is designed to help Microsoft enterprise customers ensure that valuable desktop and network resources are accessible only to authorized users, whether they are working within or outside the firewall. The Company has received a significant number of requests from existing and potential customers to participate in this Beta Test Program. The formal launch of the RSA SecurID for Microsoft Windows solution is planned for the fall of 2004.
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RSA® Federated Identity Manager: The Company announced RSA Federated Identity Manager in April. Formerly an integrated module of the RSA ClearTrust ®software, the new free-standing solution enables organizations to easily implement a federation system that can securely exchange trusted digital identities across the boundaries of corporate networks. Because RSA Federated Identity Manager interoperates with third-party identity and access management products as well as RSA ClearTrust software, the solution creates a compelling entry point for RSA Security into competitive accounts. The solution also delivers increased value for the Company’s existing customers through its one-of-a-kind integration with RSA SecurID authentication products. This integration facilitates the sharing of strongly authenticated digital identities, which ultimately increases the overall trustworthiness of the federation system.

• RSA® Sign-On Manager: Announced in June, RSA Sign-On Manager is a new Secure Enterprise Access solution that combines RSA Security’s best-of-breed strong authentication products with Enterprise Single Sign-On (SSO). The solution delivers a wide range of strong user authentication options including tokens, smart cards and digital certificates; enterprise-class policy and credential management; and an innovative new secure self-service emergency access and password reset capability. These features are designed to translate to significantly reduced help desk costs from password resets, improved enterprise security, and increased end user productivity. Combined, these capabilities deliver the broadest range of secure enterprise access capabilities for Enterprise SSO from a single vendor.

"In the months ahead, we will continue to capitalize on the growth we see in the market," Coviello said. "A high priority is working to grow the core strong authentication business by extending our solution to inside the firewall with the shipment of RSA SecurID for Microsoft Windows solution. At the same time, we will continue on our path to becoming the market-share leader in web access management. This growth strategy has enabled us to post strong results in recent quarters, and we believe that we can continue to deliver in the quarters ahead."

Business Outlook
RSA Security’s financial guidance for the third quarter of 2004 assumes no material change in the global IT spending environment. This guidance is current as of today only, and is based upon the Company’s expectation of an effective tax rate of approximately 20% for 2004. RSA Security undertakes no obligation to update its estimates:

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Total revenue in the range of $73 million to $76 million, or 13% to 18% year-over-year growth.

• Diluted earnings per share in the range of $0.10 to $0.12, compared to $0.06 earnings per share a year ago.

RSA, the RSA logo, SecurID and ACE/Server are either registered trademarks or trademarks of RSA Security Inc.
in the United States and/or other countries. Microsoft and Windows are either registered trademarks or trademarks
of Microsoft Corporation in the United States and/or other countries.

© 2004 RSA Security Inc. All rights reserved.